Shareholder Rights and Activism

Companies in the United States that are publicly traded must comply with a bevy of securities and exchange laws that affect their corporate governance, how shareholders are treated, and so much more. Shareholder rights are a major part of a public company going public, as are shareholder resolution proposals.

Levels of Shareholders Rights

Companies issue different types of stock that confer a certain set of ownership rights on the respective stakeholders. This will typically include common stock, preferred stock, and bonds, though companies certainly get creative and issue others. Common stock is held by common shareholders, while preferred stock confers a higher level of rights on a more select group of shareholders. Bondholders are another step above that. Common stockholders can vote on big proposals such as mergers, acquisitions or major asset sales, can elect directors, can reap of its from rising stock values as well as dividends. They also have access to corporate records, and can sue the company for unlawful acts. However, common stockholders are the last of any stockholder to get paid out in the event of a bankruptcy or liquidation. Preferred stockholders, on the other hand, have higher preference, but typically will not have voting rights that common shareholders have. Thus there is a tradeoff: security for voting power. (Bondholders are different from stockholders in that they do not have voting rights and cannot share in profits like stockholders, but get first priority for payouts on those bonds if the company goes south.) These are all general parameters of stock ownership, and companies can tailor types of stock and name them as they wish so long as they meet minimum legal requirements for publicly traded companies.

Shareholder Resolutions

In addition to basic rights, shareholders themselves can make proposals and submit resolutions for consideration by the other shareholders and to be put to a vote. These will cover things like executive compensation, labor issues, environmental issues and others that the company can change and follow. One drawback for shareholders is that these resolutions are typically not binding, unless the company’s charter provides otherwise. Thus it is more of a way for shareholders to voice concern about an issue or tell management how they would like for certain things to be handled. It is important to note that under securities laws, management can’t prevent such votes from going forward and generally must include them in materials submitted to shareholders prior to annual meetings where votes occur (except in some situations). Management is not bound by the outcome of the vote, but could possibly be influenced by this, thus giving a sort of activist quality to shareholder resolutions. For example, in recent news, both eBay and Walmart shareholders proposed their own respective resolutions that if adopted by management, would mandate that the companies publicly report gender disparities in pay, and to take steps to remedy any disparities. This exemplifies a social responsibility issue taken up by stockholders.

More Impactful Shareholder Votes

Ultimately in order to change the initiatives or the direction of a company, voting to change Directors, and consequently to cycle in new management, is typically the only practical way to accomplish this degree of change. Voting on Directors is one of the key responsibilities of shareholders. Also, shareholder votes are only binding in a sense when they govern acquisitions or mergers, or other massive decisions such as a major sale of assets, it truly depends on the volume and value of such a sale.